Tax Loss Harvesting

On today’s podcast, I’m talking to my buddy Joe Saul-Sehy from the Stacking Benjamins Podcast about tax loss harvesting and tax efficient investing. This episode topic came from a Martinis and Your Money listener who wanted to know more about it after seeing it advertised on Betterment’s website. As Joe and I discuss on the show, we are not tax experts, but hopefully our thoughts around this topic help listeners understand it a little better.

What are we drinking?

Joe — Dark Magic coffee

Shannon — Coffee

Podcast Notes

Tax loss harvesting is a strategy you can use to help manage a taxable portfolio.

Tax loss harvesting is typically a tool used to help offset earnings for bigger portfolios when you may require more strategy around your portfolio management.

You can take advantage of of this tool throughout the full calendar year.

Some people say that when there are disruptions in the market, maybe its time to think about tax loss harvesting.

Tax loss harvesting is more for those close to retiring.

Betterment uses tax loss harvesting as a big selling point, even though their services are more geared towards 20-30 year olds.

Taking the time to study where they should and should not be harvesting losses and then decide where to go from there is generally not worth it for 20-somethings.

You would only take advantage of tax loss harvesting in a brokerage account, not in a tax-protected account like a 401k, Roth IRA, IRA, etc.

To avoid this, one strategy is to put investments that trigger more taxable events in a tax-advantaged account.

Learning about tax loss harvesting before you actually need it helps your financial advisor when it is time to start discussing this strategy.

Exchange-traded funds and mutual funds are the places where you can use tax loss harvesting without really thinking too much about the consequences.

You have to pay a lot more attention to how this works and do a lot more homework with individual stocks before you harvest a loss.

There are situations with individual stocks where you can’t use your loss based on IRS tax rules.

You can use your loss to offset your gains and use whatever is left up to $,3000 to lower your taxable income for the year.

The #1 reason to consider using tax loss harvesting is when you have a gains situation where you have to take them or need to take them.

Joe suggests a variant of tax loss harvest that 20-somethings (or anyone) can use inside a Roth IRA to be able to take back contributions.

Investments can either be tax efficient or tax inefficient.

Tax efficient investments don’t trigger a lot of taxable events so you would want to put them in non-tax protected accounts.

Tax inefficient investments do trigger taxable events so you would want to put them in tax-advantaged accounts.

TAKEAWAYS

You shouldn’t allow taxes to define your investment strategy.

As your investments and your tax brackets grow, you should certainly make strategic decisions where taxes are concerned.

Reach out to tax experts for more in-depth help on these strategies.

Have you employed tax loss harvesting? Have you had to pay taxes on your investment portfolio?

Shannon is a financial planner who left a “traditional” financial services firm to start her own company, The Financial Gym, because she felt traditional financial services firms did not have the tools or resources to help people in their 20s and 30s who are starting out and trying to build assets while also managing debt. She realized that the key to long-term personal financial success is a commitment to financial fitness and making smart financial choices.
Through her blog, Financially Blonde, her book, Train Your Way To Financial Fitness, her podcast, Martinis and Your Money and The Financial Gym, Shannon is committed to making financial fitness fun, easy and accessible for everyone.